Financial services firms and their representatives provide investment advice, execute investment transactions, maintain investment accounts and perform a variety of financial planning and other services for the firm's clients. All of these transactions are governed by regulations designed to protect the client, the financial services firm and the representatives (“financial advisors”). An important factor in risk assignment is the length of the period of time for a particular risk that is appropriate for the particular client.
The amount of trading in a particular account is an important factor that the client and the financial advisor must both keep in mind. Since commissions are paid on transactions the client is not helped by unnecessary trading in its account. On the other hand, a reasonable amount of trading is necessary to maintain a balance between the client's risk tolerance and account growth potential. Typically, commissions are paid on individual trades. These commissions are set at rates that reflect the expertise available to the client as investment advice and are typically negotiated for each trade. Thus financial services firms that have established research departments to advise clients will charge higher commissions than firms (so-called “discount brokers”) that merely execute transactions without providing investment advice.
For clients with substantial investment portfolios that are actively traded, annual brokerage fees may be charged in lieu of individual trade commissions. Such a commission-free system requires certain safeguards. The appropriate clients have to be identified and the system has to be explained candidly to the identified clients. The amount of trading by the client has to be limited in some way so that excessive trading is not encouraged by the absence of individual transaction fees. Typically, this is accomplished by placing limits on the number of commission-free transactions.
In prior systems, fixed fees are structured for a particular asset class within an account. Thus, there would be one fixed fee for stock securities, another for fixed investment securities such as bonds, and yet another for cash or money market funds, etc. This array of fees was believed to be necessary in order to allow for appropriate pricing of the account, i.e., such predictability was deemed necessary to properly price the services.
However, the prior systems lack a method for determining a single pricing structure for financial advisory services which cuts across the various investment classes and which does not vary greatly from one billing period to another despite variations in the asset classes held at any particular point in time, but instead yields a flat fee designed to be appropriate over an extended period of time. The prior systems lack a method that allows appropriate pricing of a service that will permit the client to trade all classes of investments appropriate for the client in a single account, without having to incur fees that lack consistency over extended periods of time since they are subject to variations in the asset classes held in the account. Furthermore, when the fees are different for each asset class, and those fees are blended (as in prior systems) to yield a flat fee for the account, the resulting blended fee may not reflect the actual level of transactions taking place or the services actually being provided for the account.